The collateral link between volatility and risk sharing

Sebastian Infante and Guillermo Ordoñez

Journal of Monetary Economics, 2025, vol. 149, issue C

Abstract: We show that the effect of aggregate volatility on idiosyncratic risk sharing depends on the nature of collateral sustaining insurance. While volatility increases the value of public assets—more useful for consumption smoothing—it decreases the value of private assets—more exposed to aggregate variation. Hence, a more volatile economy weakens risk sharing when collateral composition is biased towards private assets. When applied to financial intermediaries that rely heavily on private collateral to share risks, aggregate instability is more likely to induce financial instability. We empirically show that the sensitivity of risk sharing to aggregate volatility indeed depends on the collateral composition as predicted by the theory.

Keywords: Collateral; Aggregate volatility; Financial stability; Risk sharing; Convenience yield (search for similar items in EconPapers)
Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0304393224001466
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:149:y:2025:i:c:s0304393224001466

DOI: 10.1016/j.jmoneco.2024.103693

Access Statistics for this article

Journal of Monetary Economics is currently edited by R. G. King and C. I. Plosser

More articles in Journal of Monetary Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().